Friday, August 29, 2008

IMF's wages warning

THE INTERNATIONAL MONETARY FUND (IMF) has added its voice to the call to moderate wages in Barbados.

The IMF said "wage moderation was needed to minimise second-round effects of the oil and food price shocks and thereby help the economy adjust in the least harmful way".

Wage negotiations were critical to determining the "effectiveness of the overall policy response to the current challenges", the IMF said.

Its executive directors warned "specifically about the risk" posed by the link between wage increases and inflation.

In the latest word from the Washington-based institution on the performance of the economy, the IMF said Barbados had done well to weather the international financial turmoil now gripping many of its top trading partners.

The fund's executive directors cautioned, however, that the international situation still posed a serious challenge to the country's economic security.

In its assessment following the Article IV consultation on Barbados released yesterday, the institution said the main threat to the economy was a possible downturn in tourist arrivals at a time of high oil and food prices.

"With the exchange rate pegged to the United States dollar and fiscal space constrained by high public debt, directors stressed the importance of addressing these challenges through a coordinated policy response," the IMF's executive board release said.

It advised the David Thompson-led administration that it had to find ways to finance programmes that helped the most vulnerable in Barbados without risking the medium-term stability of the economy.

In addition, the fund "welcomed the recently revised budget, which combines a reduction in the central government deficit with well-identified revenue measures to finance additional social and other priority spending".

Directors encouraged the Government to make "additional efforts to generate a modest overall public sector surplus over the medium term, to reverse unfavourable debt dynamics and put public debt on a firmly declining trajectory".

The IMF agreed with the country's monetary policy which was aimed at containing inflation, describing it as "appropriately tight".

At the same time, IMF economists believed it might be time to reduce interest rates "should a more severe slowdown in economic activity be accompanied by easing of inflationary pressures".